Botswana’s foreign reserves retreated slightly in February, coinciding with the slowdown in the diamond trade that contributes significantly to foreign exchange earnings and the government revenue.
According to the recently released Bank of Botswana’s statement of financial position for February, the nation’s total foreign reserves shrunk to P56 billion in February compared to January’s P60.5 billion. However, on an annual basis, the foreign reserves are higher than February 2022’s P54 billion. The central bank manages foreign exchange reserves through two portfolios; the Liquidity Portfolio and the long-term investment portfolio know as Pula Fund.
The Pula Fund, which accounts for a large portion of foreign reserves, also fell slightly to P46.4 billion from the prior month’s P46.5 billion. The government investment account (GIA), which represents the government’s share of funds in the Pula Fund, declined from P16.8 billion to P13.6 billion, but still higher than February 2022’s balance of P8.5 billion. The decline in the GIA coincides with the slowdown down in diamond trade in the first half of the year, with all trades coming lower than the same period last year.
The GIA was nearly decimated in 2020 as government relied on it to finance budget deficits. The account dropped from 2019’s balance of P18.3 billion to P2.8 billion in 2020, the lowest balance on record, and finished 2021 with P5.6 billion in the account. Prior to the financial crisis of 2008/9, the GIA was valued at P30.5 billion in December 2008.
With the rapid decline in the sovereign wealth fund, the Finance ministry embarked on fiscal sustainability to improve revenue collection and contain expenditure in efforts to return to budget surpluses – using the extra cash to shore up the GIA and maintain it as a fiscal buffer against future shocks.
During the national budget speech in February, the Finance minister Peggy Serame explained that part of the GIA is accounted for by special funds and deposit accounts, which have designated uses or are held on behalf of third parties, thus may not be automatically available for budgetary purposes.
“Low GIA levels limit the extent to which government can draw on its reserves to finance future budget deficits, leaving borrowing as the main financing option,” the minister said in her speech.
Since her appointment as chief of the country’s treasury in April 2021, Serame has reiterated the urgent need to contain expenditures in order to manage the fiscal deficit, which is the main driver of the declining GIA. The government has been plagued by budget deficits since 2017, adding up to nearly P50 billion in the past six years.
Following the strong performance of its diamonds in 2022, the country has forecasted lower budget deficits. The Finance ministry officials says the country is not out of the woods yet, forecasting a budget deficit for the recently ended 2022/2023 financial year to be P4.9 billion.
For the current financial year 2023/2024, Serame’s budget for the country forecasts total revenue and grants at P79.8 billion, lower than the expected government expenditure of P87.38 billion, resulting in budget deficit of P7.6 billion.
The minister indicated that the budget outrun will be financed through a combination of financing options, which include issuance of P3 billion in government bonds and treasury bills, P2.7 billion from external loans, and P2.2 billion is expected to be drawn from the GIA.
